Let’s talk about the second and equally if not more significant edge that investors can develop: behavior. To read more about the factors that can help an investor gain an advantage over the market do check out our article The Investor’s Edge: Variant Perception. Today informational and analytical edges are increasingly rare and hard to find. Today the primary edge is behavioral and this is what we seek to address. The ideal behavior has a few characteristics that I will now describe. Even if you’re not born with them or it’s not your natural instinct, these characteristics can be slowly developed and honed over time so worry not and simply focus on self-improvement:
Optimism
Successful investors are often the most optimistic people you may know of. It’s a powerful way to not get swayed by the market’s crazy behavior because you know in the end your stock will perform and everything will work out. I know some people have a half glass empty approach to life and are cynical by nature. While some degree of skepticism can prevent irrational optimism, investors in general need to be bullish and believe that the future is going to be better than today.
Patience
Long term investing is not for everyone. You need to be patient and accept deferred gratification. That means sacrificing your short term needs to satisfy your long-term goals. Inexperienced investors like inexperienced drivers want action while they should be doing the exact opposite that is staying still and reducing activity. More activity leads to more risks and leads to lower returns. Patience is a virtue and the long-term investor’s best friend. Why focus on the short term when you’re anyway going to make returns in the long term? Compounded returns are back dated and hence it is vital for investors to stick around.
Courage
When you find the right opportunity, don’t think twice, and buy bucket loads of the stock. Courage to act quickly and decide on buy/hold/sell is a strong determinant of success. Investors shouldn’t get stuck in analysis paralysis and have the courage to act when it’s required the most. It’s helpful to keep a list of stocks in your watch screen which you have researched and are waiting to buy given favorable conditions. You should also be courageous to face negative facts about your holdings and change your position when required.
Focus
The market has thousands of stocks. Every day, thousands of people post their opinions about different companies on social media and news channels are constantly talking to some supposed expert or a promoter to highlight their company. Newspapers have eye catching headlines about geopolitical events and their impact on the country. The point is that our world is full of noise. It is the investor’s duty to keep his head down, maintain calm, avoid being overwhelmed, filter out all the useless information and focus on his style and watchlist. Other things be damned.
Contrarian streak
To make superior returns, one must go against the market’s wisdom and be proven right. Even if your score is 6/10, I promise the results will be beyond your imagination because compounding will do wonders to your portfolio. So, we need to be comfortable holding views which are contrary to what the market believes as this can turn out to be the biggest source of alpha. If your views match those of the market, then your returns will match that of the market and you won’t be able to beat it.
Lifelong Learning
Investing is a dynamic field which encourages a growth mindset and lifelong learning. Reading 20 books will take you far but if you really want to be great at investing, then you must continuously research, evolve your knowledge base, learn to think differently and have an opinion about the latest events. If you don’t, you’ll miss out on big upcoming trends and realize that young 20 somethings are racing past you in terms of profit generation. A curious and active mind is a precondition to lifelong learning. Otherwise, you might just get intimidated by the effort involved. Ideally, everyday when you go to bed, you should be smarter than when you woke up.
Cognitive dissonance
As Gautam Baid rightly pointed out in his famous book the Joys of Compounding, great investors are comfortable holding contradictory views about various things. This might seem irrational but one must take into account that the market too isn’t always logical. So, it’s important for the investor to know both sides of the coin and have multiple different perspectives even if they may oppose each other. This might sound easy in theory but in reality most people have a very hard time thinking this way.
Pattern recognition
Mark Twain once said that history never repeats itself, but it often rhymes. This is especially true for the stock market. As you gather more experience, you’ll learn that while most things change, some stay the same and this could become your source of advantage. To learn about pattern recognition, study the history of stock markets worldwide and significant historical events. You’ll understand that while people’s clothes and gadgets have changed, their greed hasn’t.
Loneliness
Being a full-time investor can be a very lonely job without much action because you only strike when the odds are massively in your favor. Even those for whom this is a part time affair, managing your portfolio is an incredibly personal activity. Your investing philosophy and style could be very different from your friends. Both of you could disagree about which stocks to buy. Hence, you’ll have to accept that you won’t have a lot of company while building and growing your portfolio.
Uncertainty
The world is filled with uncertainty and random, unpredictable events (some Black Swans). Investors should be like Zen masters or stoic philosophers – being unaffected by events happening in the world outside. When you’re calm and level headed, then your mind can work through all the noise, and make a well thought decision. You should happily welcome uncertainty and try to treat it as your friend. I know this is easier said than done. But having the right attitude can help you deal with it in a more prepared and mature way.
Joys of investing
Are you investing because you like the process or is it just for the money? If you talk to successful investors the answer will be unanimous, they invest because they love investing and money earned is a byproduct. You have to treat investing as a labor of love, something that you have to be deeply passionate about – money will come with time. Unless you really enjoy the process, you’ll find it hard to stick around the market’s wild swings and will lose sight of compounding’s wonders which are only visible in hindsight after years and years of effort.
If you already have some of the above characteristics in your behavior and overall personality, good for you. If you don’t, then start taking some conscious effort and work on improving even a small % every now and then and within a few years you’ll start seeing amazing results.
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